Delta: Setting A New Standard. Deutsche Bank Global Industrials and Basic Materials Conference June 4, 2014

Transcription

1 Delta: Setting A New Standard Deutsche Bank Global Industrials and Basic Materials Conference June 4, 2014

2 Safe Harbor This presentation contains various projections and other forward-looking statements which represent Delta s estimates or expectations regarding future events. All forward-looking statements involve a number of assumptions, risks and uncertainties, many of which are beyond Delta s control, that could cause the actual results to differ materially from the projected results. Factors which could cause such differences include, without limitation, business, economic, competitive, industry, regulatory, market and financial uncertainties and contingencies, as well as the Risk Factors discussed in Delta s SEC filings. Caution should be taken not to place undue reliance on Delta s forward-looking statements, which represent Delta s views only as of the date of this presentation, and which Delta has no current intention to update. In this presentation, we will discuss certain non-gaap financial measures. You can find the reconciliations of those measures to comparable GAAP measures on our website at delta.com. 2

3 Setting A New Standard Taking Momentum into 2014 Building on a record setting 2013 with further earnings growth, margin expansion and free cash flow generation in 2014 Setting the Long-Term Foundation Leveraging Delta s strengths with initiatives to further our financial momentum and achieve long-term financial goals Balanced Capital Deployment Balanced cash deployment allows for reinvestment in the business, strengthening the balance sheet through debt and pension reduction, and returning cash to shareholders 3

4 Outpacing The Airline Industry Delta is the leader in an evolving industry $3,038 LTM 1Q14 Pre-Tax Income ($M) $2,563 March Quarter 2014 Highlights Record $444 million pre-tax profit, a $363 million increase year over year, with 400 basis points of pretax margin expansion $1,408 $904 $688 $390 million of free cash flow, adjusted net debt of $9.1 billion, $600 million contributed to the pension plans, and $175 million returned to shareholders Highest customer satisfaction scores among network carriers $262 Recognized as Fortune s Most Admired Airline, Best Airline by Business Travel News, and Airline of the Year by Air Transport World Excludes special items 4

5 Taking Momentum Into 2014 Producing a record June quarter result with 10% top line growth, ~400 bps of margin expansion, and nearly $1.5 billion of free cash flow June 2014 Quarter Estimate Operating margin 14% - 16% Fuel price $ $2.98 CASM ex fuel change year over year Up 0% - 1% Profit sharing System capacity change year over year $350 million Up ~3% Note: Fuel price includes taxes, settled hedges, refinery contribution and excludes MTM adjustments; CASM ex-fuel excludes special items and profit sharing 5

6 Generating A Revenue Premium To The Industry Investments in the network, product and operations have produced solid, sustainable revenue gains, with a pipeline of initiatives in place to keep the momentum going Delta Passenger Unit Revenue vs. A4A Average Initiatives To Keep Momentum Going 106% 106% 107% Operational performance Corporate gains 100% 102% Investments in New York and Seattle International partnerships Aeromexico AFKLM / Alitalia GOL Virgin Atlantic YTD 2014 Merchandising initiatives 6

7 Sustaining Our Cost Performance Initiatives have contributed to our ability to keep non-fuel unit costs below 2% 46% 4.6% 3.7% Non-Fuel Unit Cost Growth Sustaining Our Cost Performance A solid base of supply chain, productivity, and maintenance initiatives in 2013 established momentum for 2014 and beyond <2% Growth 1.2% 0.3% 0 1% H13 2H13 1Q14 2Q14E Long Term Leveraging the strengths across the business to sustain this cost performance going forward Domestic refleeting Maintenance Headcount Supply chain Productivity Technology Excludes special items 7

8 Reducing Risk Across the Business De-risking is key to driving better consistency of results throughout the business cycle Business Risk p y Diversifying the top line nearly 20% of annual revenues are generated from non-ticket sources like ancillary products and services, cargo and third-party business services Immunized joint ventures with AirFrance/KLM/Alitalia, Virgin Atlantic and Virgin Australia hedge currency and economic risk Labor Risk Partnering with employees produces the best relations in the industry Profit sharing program aligns employees and shareholders interests Financial Risk Keeping fixed cost base low, including aircraft ownership, allows for flexibility with capacity levels Reducing fuel risk through hedging and ownership of Trainer Refinery Stronger balance sheet nearly 50% reduction in debt since 2009 has lowered annual interest expense by $500+ million Proactively addressing pension obligations on path to reduce pension liability by two-thirds by 2020 at current funding levels 8

9 Long-Term Goals Guide the Planning Process Our long-term goals target solid margins and cash flow, investment grade quality balance sheet, and sustainable shareholder returns Long-term goals provided the core foundation for our updated five year plan targets Operating Margin 10-12% annual operating margins Operating Margin 11-14% operating margins EPS Growth Annual EPS growth of 10% - 15% EPS Growth Annual EPS growth of 10%- 15% after 2014 ROIC 15%+ return on invested capital ROIC 15-18% return on invested capital Cash Flow $5+ billion annual operating cash flow with ~50% reinvested back into the business Cash Flow $6 billion annual operating cash flow and $3 billion free cash flow Balance Sheet Investment grade credit metrics and $7 billion adjusted net debt by 2015 Balance Sheet $5 billion adjusted net debt by 2016 and pension at 80% funded status by

10 2014 s Five Year Plan Continues Our Momentum 2014 s five year plan shows path to achieving our long-term financial goals with margin expansion, free cash flow generation, and balance sheet improvement Revenue Growth Grow passenger, ancillary and third-party business revenues by harvesting investments in operational reliability, products, and network Capacity Discipline Maintain historical capacity discipline through conservative fuel and GDP assumptions and fleet flexibility Cost Efficiency Focus on all areas of the cost base maintain non-fuel unit cost growth below 2% annually, manage fuel costs and risk through the refinery and hedging, and continue interest savings from debt reduction Strong Cash Flow Allocate $6 billion annual operating cash flows to reinvestment in the business, strengthening the balance sheet through debt reduction and incremental pension funding, and returning cash to shareholders 10

11 Strong Cash Generation in the Business Strong operating cash flow, combined with disciplined capital spending, produces sustainable free cash flow $6.0 Capital Spending and Operating Cash Flow ($B) $5.0 $4.0 $3.8 $4.8 $4.1 $4.1 CapEx Operating Cash Flow $3.0 $2.0 $2.6 $2.9 $2.9 $2.6 $2.1 $2.0 $1.8 $2.3 $1.0 $1.3 $1.2 $0.9 $1.2 $1.3 $1.3 $ E $(1.0) $(2.0) Note: Includes pre merger NWA; Excludes special items 11

12 Debt Reduction Remains A Priority Debt levels have been reduced significantly, but more delevering is needed; targeting $5 billion of adjusted net debt by the end of 2016 Debt reduction provides earnings tailwind; interest expense at $5 billion debt level should be ~$350 million per year, down from $750 million in 2014 and $1.3 billion in 2009 Further delevering creates value by: Reducing Delta s cost of capital, lowering funding costs Improving earnings through lower interest expense De-risking the business through a healthier balance sheet Providing more consistent access to the capital markets by reducing leverage and improving Delta s credit metrics $17.0B Adjusted d Net Debt $15.0B $12.9B $11.7B $9.4B $5.0B E Excludes special items 12

13 Addressing Long-Term Pension Obligations Targeting 80% funded status by 2020 Plan to maintain i pension funding at $1 billion per year through 2020, consistent with levels Incremental pension funding helps drive balance sheet improvement At current rates, pension would be 80% funded and balance sheet liability reduced to $3.5 billion by 2020 With a 100 bps increase in discount rates, the liability would decline to $2 billion over that time 100% 90% 80% 70% Pension Funded Status Higher funded d status t will reduce pension expense, 60% currently at $230 million for % Plans are permanently frozen and closed to new participants. No additional benefits are accruing to 40% existing plan participants Continued flexibility on future funding as a result of airline relief contained in the Pension Protection Act of 2006 Delta has until 2031 to fully fund pension plans At current discount rates With 100 bps increase in discount rates 13

14 Increasing Shareholder Returns Demonstrating a strong commitment to shareholder returns with 50% increase to the dividend and a new $2 billion share repurchase authorization Return levels moving closer to averages of high quality industrial peer set Regular Dividendid d Share Repurchase Authorization ti $300 million per year $2 billion through 2016 Dividend represents a long-term commitment to returning cash to our owners Increasing quarterly dividend by 50% to $0.09 per share beginning in the September 2014 quarter Share repurchase program provides flexibility to adapt to seasonal cash flows and changing economic conditions Have shown our willingness to accelerate buybacks with excess free cash flow New $2 billion share repurchase to be completed no later than December 31, 2016 May 2013 $500 million authorization ti completed two years ahead of its expiration date Plan To Return Additional $2.75 Billion To Shareholders Through

15 The Path To Improved Valuation Plan targets compare favorably with other high quality industrial transports and should help drive better valuations ROIC 15 18% 14% Free Cash Flow $3.0B 10 15% EPS Growth 14% $1.5B Delta High Quality Industrial Transports Delta High Quality Industrial Transports Delta High Quality Industrial Transports 10.9 Forward Price to Earnings EV to EBITDA Note: High quality industrial transports are companies with similar index characteristics to Delta part of S&P 500 and Dow Transportation Index (CHRW, CSX, EXPD, FDX, KSU, NSC, R, UNP, UPS); For high quality industrial transports, ROIC is five year historical average and free cash flow and EPS growth are analyst consensus. Data source is Thomson One Excludes special items 15

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17 Non-GAAP Reconciliations Non-GAAP Financial Measures Delta sometimes uses information ("non-gaap financial measures") that is derived from the Consolidated Financial Statements, but that is not presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"). Under the U.S. Securities and Exchange Commission rules, non- GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. The tables below show reconciliations of non-gaap financial measures used in this presentation to the most directly comparable GAAP financial measures. Forward Look ing Projections. Delta is unable to reconcile certain forward-looking projections to GAAP as the nature or amount of special items cannot be estimated at this time. 17

18 Non-GAAP Reconciliations Pre-Tax Income and Margin Delta excludes special items from pre-tax income and margin because management believes the exclusion of these items is helpful to investors to evaluate the company's recurring core operational performance in the periods shown. Therefore, we adjust for these amounts to arrive at more meaningful financial measures. Special items excluded in the tables below showing the reconciliation of pre-tax income are: Mark-to-market adjustments on fuel hedges recorded in periods other than the settlement period ("MTM adjustments"). MTM adjustments are based on market prices at the end of the reporting period for contracts settling in future periods. Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period. Therefore, excluding these adjustments allows investors to better understand and analyze the company's core operational performance in the periods shown. Restructuring and other items. Because of the variability in restructuring and other items, the exclusion of this item is helpful to investors to analyze the company s recurring core operational performance in the periods shown. Loss on extinguishment of debt and other. Because of the variability in loss on extinguishment of debt and other, the exclusion of this item is helpful to investors to analyze the company s recurring core operational performance in the periods shown. Three Months Ended March 31, Last Twelve Months Ended (in millions) Change March 31, 2014 Pre-tax income $ 335 $ 3 $ 2,859 Items excluded: d MTM adjustments 34 (24) (218) Restructuring and other items Loss on extinguishment of debt and other Pre-tax income, excluding special items $ 444 $ 81 $ 363 $ 3, Change Pre-tax margin 3.8% 0.0% Items excluded: MTM adjustments s 0.4% -0.2% Restructuring and other items 0.5% 1.2% Loss on extinguishment of debt and other 0.3% 0.0% Pre-tax margin, excluding special items 5.0% 1.0% 400 pts 18

19 Non-GAAP Reconciliations Free Cash Flow Delta presents free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for debt service or general corporate initiatives. Three Months Ended (in millions) March 31, 2014 Net cash provided by operating activities $ 951 Net cash used in investing activities (561) Total free cash flow $ 390 Adjusted Net Debt Delta uses adjusted total debt, including aircraft rent, in addition to long-term adjusted debt and capital leases, to present estimated financial obligations. Delta reduces adjusted total debt by cash, cash equivalents and short-term investments resulting in adjusted net debt to present the amount of assets needed to satisfy the debt. Management believes this metric is helpful to investors in assessing the company s overall debt profile. Three Months Ended December 31, December 31, December 31, December 31, December 31, (in billions) Debt and capital lease obligations March 31, 2014 $ $ $ $ $ $ 17.2 Plus: unamortized discount, net from purchase accounting and fresh start reporting Adjusted debt and capital lease obligations $ 11.4 $ 11.7 $ 13.2 $ 14.4 $ 15.9 $ 18.3 Plus: 7x last twelve months' aircraft rent Adjusted total debt Less: cash, cash equivalents and short-term investments (3.7) (3.8) (3.4) (3.6) (3.6) (4.7) Adjusted net debt $ 9.1 $ 9.4 $ 11.7 $ 12.9 $ 15.0 $

20 Non-GAAP Reconciliations Non-Fuel Unit Cost Cost per Available Seat Mile or Non-Fuel Unit Cost ("CASM-Ex"): We exclude the following items from consolidated CASM to evaluate the company s core cost performance: Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year non-fuel financial performance. The exclusion of aircraft fuel and related taxes (including our regional carriers under capacity purchase arrangements) allows investors to better understand and analyze our non-fuel costs and our yearover-year financial performance. Ancillary businesses. Our ancillary businesses include aircraft maintenance and staffing services we provide to third parties and our vacation wholesale operations. Because these businesses are not related to the generation of a seat mile, we exclude the costs related to these businesses to provide a more meaningful comparison of costs of our airline operations to the rest of the airline industry. Profit sharing. We exclude profit sharing because this exclusion allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry. Restructuring and other items and MTM adjustments. We exclude restructuring and other items and MTM adjustments from CASM for the same reasons described previously under the heading Pre-Tax Income & Margin. Year Ended December 31, CASM Items excluded: Aircraft fuel and related taxes (5.32) (5.00) Ancillary businesses (0.38) (0.37) Profit sharing (0.16) (0.11) Restructuring and other items (0.20) (0.10) MTM adjustments 0.01 (0.01) CASM-Ex Year-over-year change 4.6% Six Months Ended June 30, June 30, December 31, December 31, CASM Items excluded: Aircraft fuel and related taxes (5.14) (5.42) (4.94) (5.22) Ancillary businesses (0.31) (0.42) (0.34) (0.34) Profit sharing (0.12) (0.12) (0.31) (0.20) Restructuring and other items (0.12) (0.16) (0.22) (0.23) MTM adjustments (0.09) (0.36) CASM-Ex Year-over-year change 3.7% 1.2% Three Months Ended March 31, CASM (cents) Items excluded: Aircraft fuel and related taxes (5.01) (5.28) Ancillary businesses (0.34) (0.35) Profit sharing (0.18) (0.04) Restructuring and other items (0.09) (0.19) CASM-Ex % 20

21 Non-GAAP Reconciliations Capital Spending Delta presents combined capital spending as if the company s merger with Northwest Airlines had occurred at the beginning of the period presented because management believes this metric is helpful to investors to evaluate the company s combined investing activities and provides a more meaningful comparison to our post-merger amounts. Full Year Full Year (in billions) Delta capital expenditures $ 2.6 $ 1.5 Investment in Virgin Atlantic Northwest capital expenditures Total combined capital spending $ 2.9 $ 2.6 Operating Cash Flow (net cash provided by operating activities, adjusted) Delta presents net cash provided by operating activities because management believes this metric is helpful to investors to evaluate the company s operating activities and cash flows. Full Year Full Year Full Year (in billions) Delta operating cash flow $ 4.5 $ 2.5 $ (1.7) SkyMiles used pursuant to advance purchase under AMEX agreement Northwest operating cash flow Net cash provided by operating activities, adjusted $ 4.8 $ 2.8 $ (1.5) 21